Co-founder or employee?

Tell him that you would love to have him be 50%-50% with you (i.e. you have seen the light and changed your mind). But because the company is worth $X million he would need to invest 50% of that (I heard that it is exactly what Eric Schmidt did for Google). Otherwise you don't mind giving him a market salary and because he absolutely rocks you will give him 10% of x in equity.

Feel free to put in a salary option that is 2x market rate with no equity - and if he chooses that can just walk away.

If he wants more equity and is willing to arrange money for it, then you should only be happy as he is willing to put in a proxy for the risk that he has not taken.

I think the need to 'sell' the position better. The idea is to give different options and have the middle one being what you want him to ideally pick.

Oh yeah, before giving him all the options - educate him about startup valuations and why the $X million makes sense.

And make sure to put in vesting for any equity he is given.

One key to your problem is that you've given him all the leverage. Since he knows he's the only one negotiating for the position, he knows he has monopoly power.

Spend a month networking and promoting the job and be sure to interview at least 5 qualified candidates for it. Either your friend is a total rockstar and deserves a huge share of the company, or you'll find a few others who are equally qualified and will have some leverage as you negotiate the equity split.

If you choose to take on a partner, you need to make sure that the founders' agreement has all the needed provisions to protect you in case things don't work out.

If you were just starting the company, I would suggest that you both be vested over time, which means that if one of you decides to move on to something else, the other founder and the company can move on. In this case, the agreement should be more one sided, since you took all the initial risk and your friend has not.

If you have any plans of raising capital, then you need to make sure that the company's valuation makes sense. That means that you shouldn't give your friend any stock, but rather sell him stock, or give him stock options. If your friend is willing to invest the needed capital to buy his way in, and the valuation makes sense, then you should not have a problem giving him the equity.

If he is not interested in being a partner under these terms, which are in the best interest of the company (since the money he invests goes to the company anyway) then offer to hire him as you planed.

I might end up missing out on hiring him, and it might take a while before someone else comes along, but the last thing you want is to have the wrong partner in your company.

To me, co-founder means "was there at the beginning". Lots of important and critical people need to be brought in to realize the vision. But many aren't able to contribute at the level I'd consider necessary for a founder.

I wouldn't do it. Offer some other title, but founder should be off limits. It sounds like you already agree with me anyway. And be sure any stock you do is vesting. I've had my share of folks joining who then needed to be let go because they weren't getting the work done.

This is an open-ended question and isn't specific enough to have a clear right or wrong answer, but it does raise some major points of concern.

First, it's clear that you don't want to give up the equity and justifiably so. Fear is motivating you to consider otherwise. In some professions highly skilled people do expect to work their way into a partnership, usually as a junior working their way up to partner. (But usually that person first proves themselves by working very hard for the firm!) Maybe that is true - and reasonable - for your industry as well. That is something that ultimately you'll need to decide because you know your business intimately. Ideally if you do give up equity you would follow Mitch's advice about stock vesting.

My bigger concern has to do with the risks of hiring a friend. Right now it sounds like this person is asking you to give up more than is reasonable. Has he offered to buy the equity he wants when he comes on board? Or does he think he warrants being given this equity in exchange for agreeing to work for you?

If it is the latter, which it sounds like, you will be starting your relationship on an uneven footing. Not good.

Plus, how are you going to feel if this new "partner" suddenly has strong opinions about the way you run the business? Someone assertive enough to insist on equity from the outset probably won't hold back his opinions about how the company is and should be run. Partnerships are tough and even the ones that seem fail-proof should be approached cautiously (backed by good legal documentation).

Even if he agrees to work for you as an employee, any hard decisions you need to make will be affected by your personal relationship, which can be pretty challenging. Business consultants often advise people to be wary about hiring family or friends ... for good reason.

I have met lots of people that want to start a company but when the rubber hits the road and sweat is required they are suddenly no where to be found. Before I would give him an equity stake make him proof that he is worth the equity stake.

Figure out what % value you think he will add to the company. Offer him that % (vesting) if he is willing to take no salary. If he wants salary figure out a a sliding scale with % coming down as salary goes up. I am a assuming if you are profitable you would be more willing to pay a salary than give away equity so have the scale reflect that.

Don't be afraid to give up equity if you think this person will really help get you to the next level. If you can double your business, you could give up to 50% equity without any net loss. I'm not saying give more than what's fair, but a stellar partner could be worth several times their equity stake in the long run.

If you're paying a salary equal to what they make now, any equity is a bonus. Make it enough to keep them motivated to grow with the same passion you have, but not so much that you can't spare more down the road for another partner or handle dilution from investors.

Don't forget vesting also.

5-10% for the critical second employee sounds really low to me.

If he's really as good as you say he is, he's probably going to be doing a lot of very cool stuff the BigCo he works at i.e., he may be able to avoid boring stuff. :)

But when building a business, the boring work is highly likely to overshadow the cool work (if any). You'll need to compensate for that. Second, it's highly likely that startup hours will not be 9-5. You need to consider that in your "market wage".

When do you plan to exit (get acquired most probably)? At that time what do you expect the value of the company to be? What will 5-10% of that be? Will working his butt off for those years be worth it? Unlikely at 5-10%.

Vesting along with a "cliff" provision should take care of concerns about bailing early etc.

He is asking too much and is not fair . You have taken the risk , made your vision into reality . Just hire him at market rate considering you have the cash to pay him and offer Incentive stocks .. Unless he is a Scientist and holds patents , now a days you can build sites or software pretty easily , talent is every where , go offshore - It is not that bad.

Any any equity you are planning on giving your friend or anyone who you bring on board is vested over time and is tied to their performance.